In water industry acquisitions, finding the reasons for a sale are crucial

InChina Business Law Journal’s April 2011 issue, our Correspondents article entitled “Legal Issues Relating to Water Industry Concessions” explored the securing of concessions by water enterprises (mainly by urban water supply and sewage treatment enterprises) through the invitation and submission of bids and the execution of concession agreements. In contrast to negotiating and executing concession agreements with governments to secure concessions, an increasing number of investors are favouring the acquisition of water enterprises that already have concession rights, permitting them to more effectively enter or expand their water business.

Why sell?

However, while pursuing efficiency, it is also necessary to be aware of the legal risks involved in acquisition transactions. Why does the seller wish to sell equity? This is a question common to all acquisition transactions, but one that water enterprises particularly need to pay attention to, the reason being: a concession is generally secured after a complex bidding procedure and long and arduous negotiations with the government, and under normal operating conditions a water enterprise’s returns are steady – so why does the seller want to pull, in whole or in part, out of a concession that it gained only with great effort?

Additionally, one of the entities involved in a concession is a government, and notwithstanding our viewing a concession agreement as a civil agreement and the government as a civil entity in the agreement, not an administrative entity, due to the special status of governments, the reason why a seller wishes to sell equity remains complex and important.

Liu Jinghua is a partner at Concord & Partners in Beijing